Creating a Tax-Free Retirement with Ed Slott
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Creating a Tax-Free Retirement Show Notes
The tax laws surrounding retirement accounts are extraordinarily complex and astoundingly confusing. The average taxpayer doesn’t just know what they’re up against; many financial advisors barely understand them either. For so many Americans, this leads to tax penalties, complications, and a whole lot of frustration, both now and decades down the line.
Joining us to talk about why this happens–and what to do about it–is my good friend, teacher, and mentor Ed Slott. If you haven’t listened to my previous conversation with him on Episode 31 of this podcast, I would highly recommend you do so before you dig into this one. Ed is America’s IRA expert, and in his new book, The New Retirement Savings Time Bomb, he shares important information about the latest threats to retirement savings and how to avoid them.
In this episode, Ed and I talk about why your IRA or 401(k) might be turning into a ticking time bomb of unpaid debt, how to stop your Social Security check from going entirely toward paying tax in retirement, how we may see the tax code change during President Biden’s time in office, and how to rethink your assets so you can safely take money out of your accounts and grow tax-free.
In this podcast interview, you’ll learn:
- Why your financial advisor probably isn’t keeping up on changes to the tax code concerning retirement accounts.
- What makes an IRA or 401(k) a uniquely complex financial asset–and how changes to the tax code are putting you at greater risk of paying even more tax later in life.
- Why the Roth IRA is the greatest planning tool ever created.
- How to take advantage of low tax rates while they’re still here–and why they’re highly unlikely to change before 2022.
- What makes the 10-year rule on inherited IRAs so dangerous–and why so many people are going to lose their inherited wealth when they’re in their top tax brackets.
- The difference between tax preparation and tax planning.
- “The only pension type asset most people have is Social Security, and that’s not nearly enough.” – Ed Slott
- “IRAs are not a good wealth transfer vehicle anymore.” – Ed Slott
- “When you see a tax bill called the SECURE Act, hold on to your wallet, they’re coming for you.” – Ed Slott
- The New Retirement Savings Time Bomb: How to Take Financial Control, Avoid Unnecessary Taxes, and Combat the Latest Threats to Your Retirement Savings by Ed Slott
- Elite IRA Advisor Group
- Episode 31: How to Avoid the Biggest Tax Traps with Ed Slott
- Schedule a Complimentary Consultation with a Modern Wealth Management Advisor
- Learn About Our Industry-Leading Financial Planning Tool
[00:00:06] Dean Barber: Hello, everybody, I’m Dean Barber, Managing Director at Modern Wealth Management, your host of The Guided Retirement Show. You are going to love today’s program. Back by popular demand, my good friend, my teacher, my mentor, Ed Slott, is America’s IRA expert. If you missed Episode 31 of The Guided Retirement Show, I’d encourage you to go back and listen to that first, that was an interview that we did with Ed Slott. And it is our most listened to podcast and most watched on YouTube.
Ed recently wrote a new book, The New Retirement Savings Time Bomb. I’m going to talk to Ed about the book, the details that are inside of it. And we’re going to be talking about how you can create a much more tax-efficient and hopefully, even a tax-free retirement. Please enjoy my interview with Ed Slott. Back by popular demand to The Guided Retirement Show, our most listened to and most viewed podcast to date, Ed Slott, America’s IRA expert.
[00:01:03] Dean Barber: Ed, great to have you back. And you got a new book out. I see there is one behind you. I have one here. It’s actually autographed by you.
[00:01:12] Ed Slott: But how did that get there? I didn’t even know that. Wow.
[00:01:14] Dean Barber: See, I got mine actually even autographed by the one and only Ed Slott. So, how are you doing, buddy? Doing well?
[00:01:22] Ed Slott: Alright. We’re still cranking it out, but everything’s virtual. Maybe we’ll get back into the real world one of these days.
[00:01:28] Dean Barber: Well, we lifted our mask mandate in May here in Kansas City. I don’t know what you’re going out there on the East Coast, but I think we’re getting closer.
[00:01:38] Ed Slott: Well, we’re coming there in Kansas City, you know?
[00:01:40] Dean Barber: That’s right. October.
[00:01:42] Ed Slott: The workshop.
[00:01:43] Dean Barber: Yeah, October, right?
[00:01:44] Ed Slott: Yeah.
[00:01:45] Dean Barber: Yep. And there’d be so much brain power in Kansas City. First tax law goes from that workshop, that would be crazy. Well, Ed, you got a lot of things going on right now. We have had more tax law changes in the last two and a half to three years, then I think I went through probably in my first 10 years in my career. And your team is staying on top of this. You’re educating advisors in your Elite IRA Advisor Group, of course, which I’ve been a part of for a long period of time.
And there’s a few things that I think we should discuss today. I want to start with talking about your new book and what was the catalyst, why your original book was titled The Retirement Savings Time Bomb and How to Diffuse It. So, you might talk about why you wrote that one in the first place, and then we can transition to what is in this new book that people really need to understand and get to know.
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[00:02:42] Ed Slott: Well, as you know, and you talked about our Elite IRA Advisor Group, people watching or listening should know that truly what it says, an elite group of advisors learning about all of these tax rules, getting this money out and addressing the tax issues. Now, you may be modest, but people should know that you helped start this group, you know that we just started. This year, 2021, is our 17th year, so.
[00:03:11] Dean Barber: It’s been a long time.
[00:03:12] Ed Slott: That’s how long you’ve been in this program.
[00:03:14] Dean Barber: Hey, I got to tell you…
[00:03:15] Ed Slott: As a group.
[00:03:16] Dean Barber: And I got to tell you, Ed, I still am learning. Every time we have workshops and even in between the workshops, when you’re sending out updates and things like that, I mean, the amount of information that’s coming at us, and if there’s things that I still have to call your office for or email and say, “Hey, here’s a question I haven’t seen. Here’s a situation I haven’t seen,” imagine what the individual consumer out there is faced with when it comes to the challenges of the tax laws that surround the retirement accounts.
[00:03:46] Ed Slott: Well, one of their biggest challenges is that the average advisor doesn’t know how deep these waters are. And as a sailor that you are, you know, there’s a lot underwater here. I hear people say, “Oh, IRAs, what’s the big deal about that?” Until you start helping people and you say, “Oh, this happened, then that happened in tax law changes.” So, I realized this about 30 years ago, and advisors like you came along and said, “Why don’t we put a study group together?” This happened almost 20 years ago, and we actually put the group together about 17 years ago. And that’s when you started.
This is a group of ongoing education, that’s some kind of commitment for our members. You see the crowds when we go back live, we’ll get 400 or 500 members at a meeting. It’s unbelievable. But if you’re watching and you’re a consumer and you have a retirement account, you’ve got to be thinking, I wonder, is my advisor, is he keeping up or she keeping up on that? And the answer is probably not. Only about 1% of advisors, and I’m being generous there, you might say, “Ed, are you saying only 1% of advisors know anything about that?” No, it’s much less. I round it up. That’s how bad it is, because most people don’t know how deep these waters are. That’s what you are saying, Dean. You were saying, “It’s just a tip of the iceberg, the IRA, but everything.”
And here’s proof, you’re going to meetings now and taking education. I’m not talking about these things. You see where somebody attends something for an hour or 20 minutes, and they call themselves an expert. These are hard core meetings. I mean, they go from early in the morning to late at night, day after day. And like you said, the in between, the updates we give you. Everybody watching or listening to this program to be saying, I want an advisor that knows how to find every break in the tax code I’m entitled to.
So, I realized that 30 years ago, when I came up with this concept of the retirement savings time bomb and wrote the original book about 20 years ago. And now, I have the new version called The New Retirement Savings Time Bomb. So, what’s new? Well, Dean talked about it before. There are a few things that are new. First of all, one item that’s new, and the time bomb, by the way, that ticking tax time bomb, say that three times fast, that ticking tax time bomb is the tax building up in your IRA, in your 401(k).
Every day that goes by that you don’t address it, you have a growing, building, snowballing unpaid debt in your retirement account that will be owed at some point, probably at the worst possible time, back to Uncle Sam, just when you need the money most in retirement, when the paychecks stop, when you may not have other sources of income like wages. And you are vulnerable to what could be future higher taxes.
So, The New Retirement Savings Time Bomb, why is it more of a problem now? Well, now we have a new generation of retirees. Dean, you might remember, a generation ago, the retirees coming out had something called, and you may want to write this down, pensions, P-E-N-S-I-O-N-S. It was a check they gave employees even after they stopped working for nothing. Can you believe it?
Yeah, people got these checks. And at some point, in the late 70s and early 80s, some smart people went to the corporate executives and said, “You know, look at your balance sheet. Look at all this liability you have. You have to pay these people who are no longer working for you. You have to pay them for the rest of their lives.” This is draining you. I have a better idea. And the corporate exec said, “Oh, I’m listening.” How about we take the responsibility and the risk of saving for retirement? Or if you miss the corporation, let’s put it on the employees. Oh, sign me up for that. That was called the 401(k).
So, now we have this new wave of retirees that don’t have guaranteed checks. Some do, but very few do. Actually, the only pension-type asset most people have is Social Security, and that’s not nearly enough. So, now, they have accounts. They have 401(k)s, 403(b)s, IRAs. And all the risks and responsibility of saving and investing and tax planning for retirement is on their shoulders.
[00:08:21] Dean Barber: Well, you know, Ed, also, 20 years ago, people didn’t have nearly as much money in these accounts because they hadn’t had it long to accumulate.
[00:08:33] Ed Slott: Right. That’s exactly my next point. So, people had these checks, and now they started building these accounts. And 20 years ago, even 10 years ago, look at the blow-up, look at the accumulation in these accounts by constant contributions. The stock market helped quite a bit. Wow, we have what I call this ticking tax time bomb because what’s happening now, for many people, the lion’s share of their wealth is sitting in a taxable tax-deferred account like an IRA and a 401(k). They have all their eggs in one giant big basket of tax that’s waiting to explode on them at the worst possible time. So, that’s what I call The New Retirement Savings Time Bomb.
And now, as you said, it’s exacerbated by constant changes and tweaking in the tax law. It used to be years before you had a new tax law. In fact, the original code that I– well, I don’t remember, but from my time, it was called the Internal Revenue Code of 1954. And then, in 1986, when they had that big ‘86 Tax Act…
[00:09:47] Dean Barber: Tax Reform Act of ‘86, yeah.
[00:09:50] Ed Slott: Yeah, they renamed the tax code, the Internal Revenue Code of 1986. You had over 30 years where you really had almost no major changes. And then, little by little, they became more frequent. And as you just said, in the last three or four years, look what’s going on. You had the Tax Cuts and Jobs Act, then you had the SECURE Act, then you had the pandemic, then you had the CARES Act.
Now, you have the two stimulus bills, the relief that came on. Now, they’re talking about another one and they’re talking about another retirement bill. Who can keep up with that? Well, actually, we do. That’s our business, and we train advisors like you so you’re up to date on all of these. So, all of this together means more of your retirement savings are at high risk of future taxes, if you don’t have an advisor that’s fluent in all of these changes.
[00:10:42] Dean Barber: Ed, let’s talk about some of the dangers. You see the worst possible time, I don’t think that a lot of people really think about– you get the required minimum distribution that comes out, you’ve got the IRA distributions during retirement that can cause more of your Social Security to become taxable, you’ve got the requirement of distributions that can cause dividends that were otherwise tax-free to become taxable and capital gains that were otherwise tax-free to become taxable. And now, you got the SECURE Act and that forces out the 10-year distribution of money when it passes to the next generation. So, you wind up with almost like a tax on tax type of situation.
So, you mentioned in your new book that you’re getting tax rates up there in that 30%, 40%, 50%, 60%, even 70%. And you’re right, it comes at the worst possible time where I’ve seen some clients where they didn’t do any planning and they come in at the age of 70 or 71 or 72, and their entire Social Security check is going to pay their taxes and then some. They’re like, how is this possible? Why is this happening? And that’s your time bomb.
[00:11:53] Ed Slott: Right, because planning wasn’t done. Here’s the big mistake people make, and I hate to say it, but people think of their 401(k) money when they look at their statement or their IRA, when they look at their statement, they think that’s their money, but it’s not all their money. It could be more of it belongs to Uncle Sam. Think of your IRA.
I hate to have you think of it like this as a joint account with Uncle Sam, because essentially that’s what it is. You have a co-owner, only your name is on it for now. They don’t want you to know that they’re going to glom most of it. Only your name is on your 401(k), but lots of people think they’re keeping that money, so they have this false sense of security. Oh, look, even somebody says, “Look at that, I have a million dollars in my IRA.”
And I’m thinking, every day that goes by, this IRA is going to get eroded like crazy if they do nothing because if you wait and wait and wait and do nothing at 72, now, you don’t get your plan, you get the government plan. Now, it’s out of your control. At 72, you’re forced to take that money down at whatever the prevailing tax rate is. And I’m afraid it’s going to be much higher, especially on larger IRA balances. So, the idea is to address this. Now, don’t wait. Like, Dean, you just said, people wake up. It’s because that’s what they do, they wake up. I bet a lot of people will come to you. Their triggering event farseeing you might be starting RMDs.
[00:13:23] Dean Barber: Yeah, but I think that our industry has done a horrible job of training advisors, not you, but our industry has done a horrible job because they’ve taught advisors for years. I’ve been doing this for 33 years and going back to day one, tell people to defer the tax as long as possible, right?
[00:13:48] Ed Slott: Right. I’m a CPA, in case people don’t know. I’m not an investment advisor or anything like that. So, I come from the CPA school. And they told you from the first day in college, your first course in accounting, they beat you over the head. You are hard wired. Always defer, defer, defer, put it off. Don’t pay, never pay a tax before you have to. In fact, they always say that, if when you were a kid, your mother told you to do something and you said, “Not now, Ma, I’ll do it later.” You would have been an accountant because you were trained to defer, to put it off and put it off.
Well, years later, I got to the realization and I became a recovering accountant because I realized this business of deferral is just building up a big tax bill for retirement when that’s the last thing on earth you want. In retirement, you want to be able to sleep at night, not worry about how high taxes will be. How much will it take to save the money?
[00:14:45] Dean Barber: One of the things, Ed, that I think probably, one of the best pieces of legislation ever written was by Senator Roth back in the 90s, and that legislation created the Roth IRA. And to me, the Roth IRA is the best planning tool that has ever been created by Congress. Why don’t you talk about the Roth IRA? Yeah, go ahead.
[00:15:10] Ed Slott: I know you have a copy of the book. Go to the Table of Contents, and you’ll see one I titled, My Roth Chapter, right in the beginning. You see the title I gave, My Roth Chapter?
[00:15:27] Dean Barber: Oh, you call it Congress’ Single Best Gift.
[00:15:31] Ed Slott: Yeah, there it is in the book.
[00:15:33] Dean Barber: Yeah, page 222. Congress’ Single Best Gift.
[00:15:36] Ed Slott: Single Best Gift. Now, I’m pretty tough on Congress in this book, but I agree. And here’s a little trivia for you. Senator William Roth of Delaware, this July 2021, he’s deceased, but he would have been 100 years old. That’s his 100th birthday this July. So, the parties on the weekend, I think that would make you popular.
[00:15:59] Dean Barber: Yeah, I did not realize he would be 100 this year.
[00:16:03] Ed Slott: And here’s another tidbit. He was the senior senator from Delaware at the same time, you know who the junior senator was?
[00:16:11] Dean Barber: No, but you’re going to tell me.
[00:16:13] Ed Slott: Joe Biden.
[00:16:14] Dean Barber: Oh, so, did Joe support the Roth IRA?
[00:16:19] Ed Slott: You know, I don’t know, but here’s another quirk, and you’re going to be really popular at parties knowing all this, I can tell already. Another quirk when– so this came out, as you said, the ‘97 Act effective for ‘98. And in 2000, Roth was defeated for Congress. I remember saying, “why did you defeat the guy who created the greatest account ever created for retirement?”
And this is why I call it Congress’ Greatest Single Gift, the ability to build tax-free forever for the rest of your life. Even after the SECURE Act cut back this so-called stretch IRA, you could still go out with your non-spouse beneficiaries, like children or grandchildren, for 10 years, but the ability to lock in tax-free growth accumulation for the rest of your life. Remember, earlier, I said every day you do nothing. You don’t see an advisor and you don’t address this, the debt in your retirement account keeps growing. Wouldn’t you love it if that could go down, and all the growth now, you don’t have to share with anyone?
[00:17:24] Dean Barber: Absolutely.
[00:17:25] Ed Slott: No matter what the rates are.
[00:17:26] Dean Barber: Absolutely. As it should be. As it should be and, Ed, remember, back in 1998, they came up with that provision where they would allow you to do a conversion from a traditional IRA to a Roth IRA. Now, income limitations back then have been removed, but you could do that conversion, and then you could pay the tax over a period of, was it five years initially when they did that the first time?
[00:17:50] Ed Slott: Four years. And that went away. And if you were watching me then, which I know you were, I encourage everybody to do it.
[00:17:57] Dean Barber: I had a lot of clients who did it, all of it. Everything that they had outside of a 401(k), they converted it. And those people lived in retirement with a whole bunch of tax-free income. And it’s amazing to watch.
[00:18:12] Ed Slott: I had one client back then who got left out of his job based on my advice. Of course, he got the last laugh. Both he and his wife were teachers and they were close to retirement. And they had each in their– I forget a 403(b) or 401(k), whatever they had, about $500,000 each. And this guy came to see me, and I said, “You know what? Take that deal.” This was ‘98, the first year, “and convert everything.” And he says, “I can’t. I’m going to make over $100,000. They had that limit.” I said, “Do it if you… Alright, you can’t. You can’t.”
He came back the next year for his taxes as I did it. I said, “How did you do it?” He said, “I believed in what you said so much. I took a six-month sabbatical so I would have my income go below $100,000, and all my teacher friends laughed at me. They say, you’re going to give up all this income just so you can pay more tax.” And you know what? This guy died recently with an $8-million-dollar tax-free Roth IRA and so did his wife.
[00:19:21] Dean Barber: Amazing.
[00:19:22] Ed Slott: Eight million, all tax-free. So, people look shortsighted. Yes, he paid some tax, but he got that four-year deal, which was nothing for him. So, the $500,000 he had eventually grew over many years till about, and in his life, he did the same investments, and both of them about eight million bucks. It was unbelievable. All tax-free. So, who got the last laugh now?
[00:19:47] Dean Barber: He sure did.
[00:19:48] Ed Slott: And then, I couldn’t do that then, but I could in 2010 when they removed the $100,000 income limit. And that’s when you got the flood of Roth conversions, including mine. And I told everybody to do it then, also, and they still gave you a great deal then. You remember the deal? If you converted in 2010, you didn’t have to pay any tax in 2010. You paid half in ’11 and half in ’12.
[00:20:15] Dean Barber: Right.
[00:20:16] Ed Slott: I know you were at my program when I said, “Everybody take that deal.” So, I took that deal. And I encourage as many people as possible to take that deal. So, look where we are now, anybody who took that deal in 2010, all the growth from 2010 to now 2021 tax-free for the rest of your life. You didn’t have to share it with Uncle Sam. So, the point is, yes, you have to pay some tax upfront, but don’t be shortsighted, you get something for your money. You get tax freedom for the rest of your life.
There are no required minimum distributions. If you need the money, you take it tax-free in retirement. If you don’t, it just keeps growing and accumulating 100% for you. I love tax-free. And I tell you, in this polarized country we’re in, even though I’m not traveling now, but when I traveled around, I always brought people together because I found everybody loves tax rate, everybody. That’s the secret. Bring people together. Tax-free is always better.
[00:21:21] Dean Barber: Let’s talk about some of the tax proposals, Ed, that are out there from our new president, Joe Biden, and a few that we want to mention, capital gains taxes, step-up in basis, and some changes in estate taxes. Let’s start with his proposals on capital gains.
[00:21:43] Ed Slott: Well, they want to raise the capital gain rate. I think it’s a bit much, but you may remember in the late 80s, under Reagan, he raised the capital gain rate and he actually made it equal to the ordinary income tax rate at about 28%. And that only lasted for two or three years. The rates were the same and everybody was okay with it then. We had a big boom then.
[00:22:10] Dean Barber: Right. Well, and the 28% was the top rate under that Tax Reform Act of 1986 as well.
[00:22:16] Ed Slott: Right. They brought the ordinary rate down, the capital gains rate up, and that was probably a good negotiation and a good place to be. I’m sorry, it only lasted a few years. And one of the reasons they did that, it stopped all the shenanigans of people trying to turn ordinary income into capital gain. It was all the same rate.
[00:22:36] Dean Barber: Right.
[00:22:37] Ed Slott: So they’re trying to do something like that now, but at too high of a rate, I think.
[00:22:42] Dean Barber: Wouldn’t that 39%? Is that what he’s proposing, 39%?
[00:22:45] Ed Slott: It’s more than that, because if you add the 3.8% Medicare, that…
[00:22:50] Dean Barber: Surtax.
[00:22:51] Ed Slott: And income tax, it’s about 43.4%. Then if you add state taxes for people in high tax states like mine in New York, you’re way over 50%. I think that’s the tipping point. I think once you get over 40%, I mean, people will deal with it, but it’s not good. And again, that was the first salvo. I know we’re recording this, but by the time somebody is watching this, it could be tamped down by then.
I don’t think it’ll pass at that higher rate, and I don’t think anything and I don’t have any inside information, just my gut. Given the 50/50 makeup of the Senate, anything extreme is just not going to pass. I don’t think so. I think they have more negotiating to do. And the same way I feel about step-up in basis.
[00:23:36] Dean Barber: Yeah, so I think that’s the most extreme thing that I’ve seen in a long time.
[00:23:43] Ed Slott: You know how long?
[00:23:45] Dean Barber: How long? Two hours.
[00:23:47] Ed Slott: 100 years.
[00:23:48] Dean Barber: 100 years, okay.
[00:23:49] Ed Slott: Step-up in basis was enacted in 1921. And over those hundred years, every time there was a war, a financial crisis, or Congress needed money, the same arguments came up. Not similar, not similar to today, the exact same arguments. Well, let’s get it from the rich people. We need money. We have a crisis. And every time it was shot down because when it got close to putting it into law and this happened every time, everyone seemed to realize our Congress found, we finally realized it would fall on all the wrong people, homeowners, business owners, property owners that have games that a lot of it is just due to inflation.
Look at a farmer or a small business person who wants– first of all, it’s hard enough to transfer, as you know, a business to the next generation. Most of them fail after the first generation. Then, you have the pandemic, which has hurt so many businesses. Now, let’s say somebody dies and they want to turn the business over to their children or grandchildren. Where are they going to get the money to pay the tax on the value of that business when all of that money is tied up in property, plant, inventory. There’s just no way to get the money out. You’ll destroy that business. I think that proposal is dead on arrival and mainly, because it affects the worse situation. And that’s what Congress realized. You don’t want this falling on homeowners.
For example, take my mother or my father. Actually, I bought the house we grew up in in 1957 for $16,000. He died years ago. After he died early in 2000, my mother sold that $16,000 house for $500,000. Do you think it was actually worth that much more? That’s just what $16,000 was worth 50 years later. A lot of that is due to inflation. You can’t tax that kind of thing. They say they’ll have an exemption, but what if one spouse, how do you allocate it? I think it’s just…
[00:26:04] Dean Barber: Well, and the whole thing on the step-up in basis, which I think will kill it for sure, I hope, is that you don’t even have to sell the property before the taxes are due.
[00:26:17] Ed Slott: Well, that’s crazy.
[00:26:18] Dean Barber: Yeah, right.
[00:26:19] Ed Slott: I saw that too. And that will never make it. I think they’re calling it like an exit tax, like you owe the tax without even realizing a game.
[00:26:26] Dean Barber: Right. So, you got a farmer, a farmer that passes away that wants to pass the farm down to his children. And there’s a huge gain on it, but they don’t want to sell the farm, but they’re going to pay the tax anyway under this proposed bill.
[00:26:38] Ed Slott: It’s insane. This will never pass, I don’t know, but I think this is too much of a shock to the system. They’re better off trimming around the edges, maybe raising the capital gain rates a little, and that’s about it, but to take away step-up in basis, remember, you’re hitting homeowners hard, that’s the bedrock of America, and small business owners. So, this is what’s happened over the last 100 years. Every time they get close, they realize, oh, this is hitting the absolute wrong people. They think they’re going to get the big billionaires. Yeah, they’ll get them, but it means nothing to them.
[00:27:16] Dean Barber: Right. So, what’s going on with the estate tax proposals right now?
[00:27:21] Ed Slott: Well, I didn’t see it in there. We thought they would take that $11 million and knock it down to $3 million, but that wasn’t in the first proposal. There was no adjustment down, but that could happen. I think that’s more likely. First of all, personally, I think the $10 million amount, which is inflation adjusted each year, so now it’s $11.7 million for 2021 or $23 million for a couple. I think that’s about the right amount. I think that covers 99.9% of the people and I think that’s fair. And they should just leave it the heck alone. Every time they start tinkering, whether people get worried, they make bad moves. Like even now, they’re talking about messing with the capital gain rate and everybody’s talking about selling everything off.
[00:28:10] Dean Barber: Right. I’ve had clients asking me the same thing and I’ve had clients go, I think Biden’s going to eliminate this amount of money that we can transfer to the next generation. Should we just sell everything now and give it all away now? I’m like, no, no, no, no, no, just hold on because you don’t make changes based on proposals. You make changes based on what comes in. And then you think through it very, very carefully and make the right decision because most of the things that are in the tax code, Ed, you’ve taught me and you’ve taught the other advisors that are part of your Elite IRA Advisor Group. There are planning techniques that can be utilized to get around these things, not to avoid them, but ways that you can minimize the pain that Congress inflicts.
[00:28:58] Ed Slott: Well, one thing I can tell you, speaking about getting around it, all they did, if any of this passes, all they’re doing, once again, Congress shooting themselves in the foot is incentivize all of us to work with our clients to do the better planning we should have been doing all along. It’s going to skyrocket the value of Roth IRAs and life insurance, tax-free vehicles. So, it’s very easy to get around all of this stuff, and Congress doesn’t see it, but I think, first of all, that’s the opening salvo. It’s not even in the early stages. It’s like embryonic stages. We don’t know what this is going to develop into, and maybe nothing at all.
Also, I feel not only that with a 50/50 Senate, anything outside of the extreme, it’s not going to pass, but also, every day that goes by that they don’t pass a tax bill, and I don’t think it’s happening for a while. It’s more likely that if they do anything, it’s not going to be retroactive because too much time has gone past with too far into 2021 for anything enacted to be retroactive. If anything passes, it will probably be effective in ‘22, which means you still have this year to do some great planning with today’s low tax rates that are known. We know what the tax rates are today and they may be the lowest you’ll ever see in your lifetime. This is the opportunity to start taking down that IRA, getting rid of that debt, use it for Roth IRAs or for life insurance.
Matter of fact, I have a whole chapter here on life insurance. I call it The Power of Life Insurance. And I don’t even sell life insurance, but I think it’s going to be– it already is a great planning vehicle, I use it myself for tax planning. And now, it’s going to be more valuable. There’s no question, whenever there’s a tax rate increase, anything tax-free becomes immediately more valuable.
[00:31:02] Dean Barber: Right. So, one of the things that we do know that is in the new laws that I think has a big impact, I looked at it as the biggest money grab that I’ve ever seen in my 33 years in this business from Congress, and that was the 10-year rule on inherited IRAs. Why don’t you talk a little bit about that, Ed? Because to me, here’s why I think it’s a money grab, because if you think about who inherits money, it’s obviously the children, sometimes it’s the grandchildren, but the children that are inheriting money are in their 50s or 60s and are in their peak earning years, so they’re already at a super high tax rate. Now, they’re going to be forced to take all the money out of their mom and dad’s IRAs when they’re in their top tax brackets. It’s crazy.
[00:31:52] Ed Slott: Right. It’s all bunched into a 10-year period at probably, I agree, their highest earning years. So, it behooves most people to stop doing what you’re doing. IRAs are not a good wealth transfer vehicle anymore. That’s what Congress did. Let’s just go back and talk about the stretch IRA. For people who don’t know, it’s a made-up term. It’s not a real thing. It’s just a term we used over many years, over decades to describe the ability before the SECURE Act to name a beneficiary like a grandchild. And if you name them, say the younger they are, the more years they could go out and stretch or extend distributions over their lifetime. So, to take it to the extreme, a two-year-old could have gone out 80 years. So, imagine that deferral building up and building up. What a legacy for generations.
Well, Congress in the SECURE act and a little bit about the SECURE act, in my 40 years of studying tax law, I’ve seen everything, but there’s always been one constant. Whenever Congress names a tax law, you can almost always bet that whatever they name it, it will do exactly the opposite.
[00:33:03] Dean Barber: Right. It says…
[00:33:04] Ed Slott: My favorite one is the Deficit Reduction Act. That one’s a good one. Look at the deficit now.
[00:33:12] Dean Barber: So, SECURE stands for Setting Every Congressman Up for a Retirement Enhancement, right?
[00:33:21] Ed Slott: No, it means you’re not secure. When you see a tax bill called the SECURE Act, hold on to your wallet, they’re coming for you. And that’s exactly what they did. So, Congress believed in this SECURE Act because they needed revenue, as usual, because of all their spending and everything else. They believed, they said, “You know what? We’re going to take a new tack. We believe retirement accounts, like IRAs and 401(k)s should only be for retirement, not as a wealth transfer or an estate planning vehicle to move those funds to your children and grandchildren.
So, we’re going to downgrade them as a wealth transfer vehicle by eliminating, ending the stretch IRA and replacing it with a 10-year rule. And the 10-year rule says, after you die, for non-spouse beneficiaries, spouses are exempt. After you die, your children or grandchildren have, as you said, Dean, 10 years to empty that account. Even if it’s a Roth, they have 10 years to empty that account, then that’s the end of it.
So, it accelerates all the tax into the 10 years. So, what does that tell you? IRAs are not worth it anymore if the point is to leave more to your children and grandchildren or other heirs. And I would tell people, look at the signs, if you’re still in the phase where you’re working and contributing, it’s probably a good move to talk to your advisor and say, maybe I’ll switch from my 401(k) to my Roth 401(k) at work so I don’t keep building up this eventual tax bill. Or maybe I’ll start contributing to a Roth rather than an IRA, start building up in tax-free territory, because that will be worth more money when you’ll need it most in retirement.
[00:35:10] Dean Barber: Another thing I like to do, Ed, which you taught is to do what I call methodical Roth conversions over a period of time and maximizing the bracket that you’re in and taking a look and forecasting out, okay, what do we think my IRA is going to be worth when the required minimum distributions start? What’s the tax rate going to look like because of that, and Social Security and other income that I’m going to have? And then say, can we convert it today at a lower rate than what we know we’re going to be in when the required minimum distribution? Certainly, if the answer is yes, then you do it.
[00:35:48] Ed Slott: The answer is almost always, yes, given what our tax rates will be in the future. And you just gave away the secret to this book. That is the secret. The foundational principle of all good tax planning is exactly what you just said, always pay taxes at the lowest rate. This is a pure tax rate arbitrage game. Think of the taxes like a stock, buy low and sell high.
It reminds me of that great saying from the old comedian Henny Youngman. He just thought this was funny, but his one line was probably the best tax planning line I ever heard. And this, he said in either the 50s or early 60s, he said, “I’m putting all my money in taxes, the only thing sure to go up.” He was right. That’s what we’re talking about in the book. You can’t be shortsighted. You have to look at the long-term benefit. That’s the secret to this book and all tax planning. Yeah, it’s better to take a lesser hit now for a big benefit later, not only for you during your retirement years, but to pass on to your loved one.
[00:36:56] Dean Barber: Yeah, I think you talked early on in our podcast here about the CPA mentality that was drilled into you from day one, defer, defer, defer, defer, defer. My feeling is that, hey, as long as we live in the United States and we have money or make money, taxes are going to be a fact of our life, right. So, tax planning is not about how do I pay as little as possible for 2021? It’s how do I pay as little as possible over my lifetime? And that’s where your tax planning comes in, and you have to open your eyes and understand that, look, as long as you’re alive and you have money or make money here in the United States, taxes are going to be a part of your lifestyle. How do you reduce those taxes over a lifetime, not in a given year?
[00:37:40] Ed Slott: Over a lifetime, that’s the key. You can’t look at one event and say, I don’t want to pay tax. Now, look at all I saved by not paying– my dentist, I think a lot of dentists have this sign in their office, ignore your teeth and they’ll go away. It’s the same thing. Ignore the problem, and your IRA will go away. It’s very easy to bury your head in the sand. Matter of fact, the same comedian, I’m trying to remember the saying, had something he said, “When I read about the evils of drinking, I gave up reading.” He buried his head in the sand.
You can’t, yeah, it’s easy to say, Oh, look, what I saved. And you’re right, the accountants also say, don’t pay a tax now, I want you to save taxes, but look at what you’re costing me later. It’s like the same thing. Ignoring your teeth. Take some of the pain now, get the cleanings, take care of them, do the things you have to do. Because if you don’t, the problem doesn’t go away, it gets worse. They’re called root canals and implants, and they’re not only more expensive later, but way more painful.
[00:38:47] Dean Barber: You know, Ed, it reminds me of, we’ve been talking about tax planning for years and years and years, obviously, working with you, but on my radio show, America’s Wealth Management Show, I had a guy come in and talk to me because we were talking about tax planning. There were some things that we had talked about in one of our educational groups that you teach. And he came in and he slid his tax return across the table to me and he said, “I just want to see how you can do better than this.” And he had a tax bill of zero.
And I said, “Well, that’s fine, but tell me this, what are you living on?” He said, “Well, I’ve got a bunch of money that’s in the bank and I just been living off of that. And there’s not enough interest to cause me to be in a taxable situation.” I said, “You’re not taking Social Security?” “No, I’m not taking my Social Security out.” I said, “Don’t you have any IRAs?” He says, “Yeah, I got about $2 million in IRAs.”
And I said, “So, when your CPA told you that you could have actually converted $90,000 of that IRA and paid only $11,000 in taxes, and then it would have been tax-free forevermore, was there a reason you didn’t do it?” And he’s like, “Well, we didn’t have that conversation.” I said, “Well, what about when he told you that it could have taken at least $25,000 out of that IRA in that year and still paid zero tax because of your personal exemption, standard deductions, etc.?” He goes, “Well, we never had that conversation either.” And I said, “Well, okay, I can help you a lot, and we’re going to…”
And so, what we did was we forecast what is R&Ds, we’re going to start at 72, and I showed him what the tax rates were going to be and how we could convert a major amount. That IRA over a period of years, has been growing tax free and got money out of that IRA. We defuse the time bomb. And now, this guy is in his 70s and he’s happy. That’s your story.
[00:40:29] Ed Slott: Yeah, that’s a big point, too. People think they pay low taxes. They’re missing out on taking advantage of the low bracket. You don’t use them, you lose them. You don’t get them back the next year because you didn’t use them the last year.
[00:40:43] Dean Barber: Right.
[00:40:44] Ed Slott: You got to take advantage of those low brackets. You either use them or lose them.
[00:40:51] Dean Barber: Yeah. And it all goes back and, Ed, I think something that gets critically missed by the CPA industry as well. And like you said, you’re a recovering CPA. So, we can talk about this a little bit because most CPAs don’t do tax planning. They do tax filing, right? They’re complying with the law. They’re helping people make sure that their taxes are filed and are done properly, but they’re not looking for it.
And why? Because they don’t ask the questions, they don’t have the financial plan in front of them to say, “Oh, these are all the things that you have. All I knew about was what was shown up on the tax return.” And so, it takes a financial plan being completed first before a good CPA can come in, and then start to put a good tax plan together. Would you agree with that?
[00:41:41] Ed Slott: Yeah, as a matter of fact, I totally agree with it, and even though I’m a CPA, I have to say most CPAs are really just history teachers. They tell you what already happened after it’s too late. So, this is what got me to where I am today. I was in the same mode because that’s how I was trained.
And you’d sit there with a client, you look at their tax situation, and you start saying things like, “Oh, you know what you could have done it all if you only did this.” Then you get this woulda, coulda, shoulda, then you walk out all depressed, then you don’t see them till next year and then you depressed them the next year. You know what you should have done? This whole woulda, coulda, shoulda. So, it hit me. I’m constantly looking behind me.
Planning, it’s a big difference between tax preparation, which is recording history and which is reactive looking back and tax planning looking forward. That’s where all the money chunks, thousands, hundreds of thousands, even millions. And taxes that would otherwise be paid can be saved. You can save a fortune in taxes even if you have a large IRA or 401(k) if you do the planning that’s available.
The whole point is you have to make the tax code work for you rather than against you. If you do nothing, it’s working against you. That’s why I always say to people, do you want your plan or the government’s plan? And they’ll say, “Well, what’s the government plan?” Why do they say that? I don’t know, but they say, “What’s the government plan?” I said, “Oh, that’s easy. That’s doing absolutely nothing and letting it all happen to you.” Well, you don’t have to choose that plan. You can get your plan moved forever tax to never tax and enjoy a tax-free retirement while everybody else is getting hit with high taxes as they go up over the years.
[00:43:36] Dean Barber: You know, Ed, I think what you have done for the advisory community, the financial planning community, and what you’ve done for the consumer with all of your public television broadcasts, it’s priceless. It really is phenomenal what you’ve done. I want to encourage everybody that’s listening or watching, get to the show notes and get a copy of Ed’s new book. It’s called The New Retirement Savings Time Bomb.
You’ll get a kick out of reading it. Not only does Ed write in a very educational way, but he also writes with some humor. As you could tell, Ed’s really a funny guy, right? Not like most CPAs. And you’ll learn a lot and you’ll be able to read a lot. And if you’d like an opportunity to schedule a complimentary consultation with us, you’ll also find a link to schedule that complimentary consultation in the show notes.
Ed, I know you’re busy. I know that you’ve got tons of things that you’re doing. And I really appreciate you taking the time to join me here on The Guided Retirement Show to help educate America.
[00:44:38] Ed Slott: Great to be here. And you’re doing the same thing and you’ve been doing it for over 20 years. And you were right what you said before, most financial advisors are just there. They’re trained to help you make money and make money, and that’s good, but when it comes to retirement accounts, just how much you keep that count. So, I don’t care how much they made you. If you’re giving it all away just when you need it most in retirement. What have you done? You built a savings account for Uncle Sam and he’s not even your real uncle.
[00:45:04] Dean Barber: That’s right. It’s Uncle Joe now. Ed, thanks. Enjoy your day. I’ll see you soon. And looking forward to having you and all of the other members of your Elite IRA Advisor Group here in Kansas City in October.
[00:45:16] Ed Slott: Just like the song, we’re going to Kansas City.
[00:45:18] Dean Barber: Kansas City, here I come. See you, Ed.
[00:45:20] Ed Slott: Okay.
[00:45:21] Dean Barber: Well, it is never at a loss of words, I can tell you that. And in those teaching programs that I’m at, six days a year, Ed gets up on stage and he teaches in that same manner for hours on hours and hours for six days. I encourage you to go ahead and get to the show notes, get a copy of Ed’s new book. It’s called The New Retirement Savings Time Bomb. And we have three of our advisors here at Modern Wealth Management that train with Ed Slott on a yearly basis, just like I do. And we have in-house CPAs. We do the tax planning that Ed and I talked about in this program. So, if you’d like to have a complimentary consultation, you can find a link to schedule that complimentary consultation in the show notes of the program.
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The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.